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Directives for directors

Nandini Lakshman | August 23, 2003

It was a gathering for the men -- and a handful of women -- who sit in the boardrooms of corporate India. On Tuesday, these board members were called together for a seminar on their future by consulting company Ernst & Young.

On Thursday it was the turn of the Bombay Chamber of Commerce, which pulled in a handful of celebrity speakers to address a galaxy of around 50 independent directors.

Why is the corporate world suddenly turning its attention to the men and women at the top? Take a look at the changes that are taking place. Earlier this month, the government hiked the sitting fees for directors from Rs 5,000 to Rs 20,000 a meeting.

But that was only one part of the picture. The fact is that the corporate world is in a fix. The Company's Amendment Bill, which is awaiting ratification, has proposed stringent guidelines on who can, and who can't be a director.

Crucially, it has changed the rules about who qualifies as independent directors. And companies have already got into a scramble to identify new people to grace their boards.

What's the problem? Quite simply, the new bill changes the definition of an independent director. As a result, anyone who has had any financial dealings with a company cannot be an independent director.

That automatically excludes the representatives of the financial institutions. Also, it knocks out lawyers and accountants who've done any work for the company.

What's more, the new bill will change the rules in other ways too. It calls for 50 per cent of the board to be independent. That becomes even tougher because the people who are currently categorised as independent directors won't qualify for that very soon.

"The numbers are whittled by the day as finding people you have not dealt with in any capacity are very few," says the head of a Rs 800-crore (Rs 8 billion) consumer product company.

The process of picking outside directors has always been a haphazard one. Scan the balance sheets and it is obvious that by and large, companies picked up independent directors through personal contacts or people who had some dealings with the firm.

But the cadres much in demand have been retired heads of companies, bank chairmen and even retired civil servants. Adds a finance director of an engineering company, "Earlier, getting HDFC's Deepak Parekh or HLL's ex-chairmen S M Datta was as fashionable as signing on management firm McKinsey. We will now have to curb our penchant for big names."

Now the focus is changing. Instead of looking for famous names, a few companies are scouting for directors with specialised expertise. That's why, according to an engineering company head, "Many are now looking at people with different skill sets to minimise the cosmetic value of the board".

Take a Mumbai-based company, which also makes soaps. A couple of years ago, when it underwent a name change, the managing director insisted on getting a cross-section of at least four sector specific professionals on board.

So today, his independent brigade has a well known strategic marketing consultant, a finance head of an auto major and a leading US-based management guru.

Certainly, companies are now giving more thought to who will join their board than they did before. In fact, some say that the board will get as much attention as the top management.

"That's because independent directors have to take their responsibilities far more seriously today," says Ketan Dalal, a member on many boards and partner at RSM & Co, a Mumbai-based audit firm.

Adds Praveen P Kadle, executive director, finance at the newly christened Tata Motors, "Now independent directors need to understand the operations of a company more. Earlier also they had to but they were not really made accountable."

Obviously, not everybody is happy with the proposed new rules. "You will sacrifice competence for incompetent directors," says Suresh Talwar, partner at law firm, Crawford Bayley & Co. Talwar sits on more than 50 boards.

Adds Anita Ramachandran, managing director of Cerebrus Consultants, who is on the boards of Geometric Software, HCL Infosystems and Bajaj Tempo, "Today, an independent director's liabilities are fairly onerous and they will be very careful to come on company boards."

This obviously strikes out a lot of the existing independent directors. At the same time, both companies and directors say that they will have to think twice before the appointments are made.

But will directors join a board if they don't know the promoter well?

"Even for a professional, there has to be a comfort level as an individual. That can come only if you have been associated with a company in some way," says Ramachandran.

D Basu, erstwhile chairman of State Bank of India who's on the board of a spectrum of private and listed companies including Jet Airways, SBI Cards and Chambal Fertilisers claims that it is essential to know the business culture of a company.

"An independent director must rely on his own understanding of business, do independent fact finding and apply his own judgement."

Another niggling issue with companies is the fact that they will have to expand their boards, going by the stipulation of having 50 per cent independent directors.

Consider the 12-member Tata Motors board. Of the four non-executive independent directors, one -- V R Mehta -- is ruled out as he is the investor representative of Unit Trust of India. As a result, Tata Motors will have to expand its board.

Or take cigarette major ITC. Its 13-member board includes seven non-executive independent directors, four executive directors and three other non-executive directors.

Of the independent directors, three are FIs representatives. So in a changing scenario, the above three cease to be independent thus pushing the non-executive director tally to six from the earlier three.

And if ITC is to maintain the balance as per the stipulation, it will have to bring in five more independent people.

At another level, directors are also worried by the fact that with the new rules, they face greater liabilities for the company's wrongdoings. "An independent director is not a detective.

"In a rational environment with checks and balances, an independent director can pick up a lot. So it all boils down to value systems," says Bharat Doshi, executive director, finance and corporate affairs at auto major Mahindra & Mahindra.

Some insist that the provisions about the directors' liabilities must be altered. "How can you haul up the directors if the management hasn't revealed all the figures," storms a director.

Even so, there's talk of setting up a training institute for independent directors. But the big question is, who will train who. "After being on the boards of companies for years, you expect me to go for training," asks a director.

But as a corporate consultant puts it: "With so many issues to tackle, the role of the independent director is surely becoming more exciting. There is no free lunch."

  • Independent directors should account for at least 50 per cent of the board
  • Companies will have to expand their boards
  • Any person who has had financial dealings with the company cannot be an independent director
  • FI nominees who were earlier considered to be independent won't be any longer
  • Independent directors have to go through a training institute

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